The Empire State manufacturing index continued its remarkable seesaw pattern as it retreated much more than expected to 0.2 in December, which suggests flat business activity, from a super-strong expansion at 31.2 in November. Forecasters were looking for a more moderate 9.1 in December. The index was in contraction at minus 11.9 in October, and forecasters were surprised by the big jump in November.

Among the highlights within the report, new orders, the leading indicator, faded to 6.1 in December from 28.0 in November, and employment notably fell into contraction at minus 5.8 in December from 0.9 in November. The six-month outlook remained pretty sunny at 24.6 in December from 33.2 in November.

After surging unexpectedly to 31.2 in November from minus 11.9 in October, the December index is expected to fall back to 9.1.

The New York Fed conducts this monthly survey of manufacturers in New York State. Participants from across the state represent a variety of industries. On the first of each month, the same pool of roughly 200 manufacturing executives (usually the CEO or the president) is sent a questionnaire to report the change in an assortment of indicators from the previous month. Respondents also give their views about the likely direction of these same indicators six months ahead.

Investors track economic data like the Empire State Manufacturing Survey to understand the economic backdrop for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers a moderate growth environment that won't generate inflationary pressures. The Empire Manufacturing Survey gives a detailed look at New York state's manufacturing sector, how busy it is and where things are headed. Since manufacturing is a major sector of the economy, this report has a big influence on the markets. Some of the Empire State Survey sub-indexes also provide insight on commodity prices and other clues on inflation. The Federal Reserve closely watches this report because when inflation signals are flashing, policymakers can reset the direction of interest rates. As a consequence, the bond market can be highly sensitive to this report. The equity market is also sensitive to this report because it is the first clue on the nation's manufacturing sector, reported in advance of the Philadelphia Fed's business outlook survey.